COVID-19 Impact on Retail Industry Incentive Compensation
Posted by Daniel Kaufman and Sam Bricker on February 12, 2021 in Thought Leadership
Meridian Compensation Partners surveyed 280 major, public client companies in late December to get an understanding on 2020 plan design changes and an early read on 2021 executive pay decisions. This cross- industry survey found that despite significant incentive plan related concerns at the onset of the pandemic, the majority of companies made no substantial changes in 2020 to annual or long-term incentives. Similarly, most companies reported that 2021 design and pay modifications will be modest.
The cross-industry survey provides valuable insight into broad market actions, but retailers faced particularly unique challenges and opportunities in 2020. COVID shut-downs and dramatic shifts in consumer and business behavior have impacted the retail space more directly than many other industries. Even within the retail industry, the impact of the pandemic was extremely variable with “essential” and online retailers having very different outcomes than traditional brick and mortar retailers.
To better understand how actions taken by retail companies differ from the general industry, Meridian isolated the survey responses from 24 retail and similar companies. Note that these results include a mix of companies across the spectrum of retail industry sub-sectors, including apparel retail, specialty stores, food retail, footwear and more.
Key Findings – Similarities to Cross-Industry Results
■ Only one in four retail companies (25%) made mid-year changes to their annual incentive plan – These results are similar to the full cross-industry study, which showed 24% of companies making a mid- year annual incentive plan change. However, over one-half (54%) of retail companies, including those that made mid-year changes to the annual incentive plan, expect to increase the use of discretion in 2020 annual incentive payout decisions.
■ A slight majority of companies are considering minor changes to the 2021 annual incentive plan – Among the anticipated plan changes, the most commonly reported changes were widening goal ranges and adding non-financial metrics. The cross-industry sample reported similar results. We do expect some retailers will consider two six-month performance cycles in 2021.
■ Making mid-year changes to outstanding performance shares is uncommon – Only 5% of the retail subset reported making changes to outstanding grants of performance shares, at least thus far, which is comparable to the 7% of cross-industry respondents taking similar actions. However, compared to historical practices, this small minority still significantly outpaces the number of companies that modify outstanding performance shares in a typical year.
Key Findings – Differences from Cross-Industry Results
The retail industry felt the impact of COVID-19 differently than many industries. The following survey results are indicative of this theme:
■ Nearly four in 10 (38%) retail companies granted executives a special one-time award in 2020 – This reflects a far greater prevalence than the 21% of cross-industry survey respondents. Among retail companies granting special awards, over one-half (56%) granted the award to all executives, rather than a targeted few.
■ One-half (50%) of companies in our sample plan to make significant changes to 2021 LTI design – Only 20% of the broad survey sample plan to make similar changes. Among those retailers making changes, the most common action is a greater use of time-vested equity or the introduction of a new financial performance metric.
■ Nearly one-third of companies (32%) anticipate 2021 LTI grant values to increase 10% or more – Only 16% of the broad survey sample plan to make similar grant value increases for 2021. Actions considered by these retailers are likely driven by companies experiencing larger impacts to outstanding PSU cycles and reduced share prices, which creates retention concerns.
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